I’m reading about situations where the parent signs for a multi-year student loan (instead of reapplying each year), and the parent agrees to make “interest only” monthly payments while the student is in school.
Im guessing that if the parent fails to make the monthly payments, the loan goes into default? or the loan reverts to a regular student loan, and no future disbursement will be made so that the student can finish his/her education.
Perhaps this interest-only payment component is now being included because parents were approved for the loans for all 4 years, from the beginning?
Maybe this type of loan came about to prevent situations where parents cosign for a year or two, but then find out they can’t qualify for years 3 or 4…and then the student can’t complete education??
As mentioned, the deal requires that the parent must make “interest only” payments each month…which keep getting LARGER as each semester’s loans get disbursed. So, if a substantial amount is being borrowed each semester, the once-affordable interest-only payment soon becomes unmanageable and banks can’t/won’t allow the payments to be deferred until after graduation.
I guess this multi-year cosigned student loan is supposed to accomplish 2 things.
help insure that the student has funding for all 4 years.
prevent the student’s balance to crazily grow while in college. Student borrows $100k and graduates with roughly $100k of debt.
Anyway, the problem seems to be that parents aren’t reading the details (not sure how much banks are disclosing) to see the projected monthly interest-only payments will be when the child is a sophomore, junior or senior.
who is seeing these loans? how is my assessment wrong? (feel free to chime in because Im not sure of the details!)
who is offering these loans?
With all the student loan debt crises out there, this seems to be another one that’s part of the problem.
Any type of loans (or other types of debt) can be structured in almost infinite number of ways. The one you described will, on one hand, reduce the lender’s exposure to the borrower by eliminating interest deferment during the first four years, and on the other hand, commit the lender to full four years without additional approval as long as the loan remains current. If the borrower fails to make interest payments during the first four years, I’d presume it will trigger an event of default, causing all remaining payments, including principal, to be immediately due and payable. It seems to make sense only for borrowers who need loan commitment for full four years or if this type of loans carries lower interest rate.
It’s not a federal loan. There are plenty of alternative loans out there. I am wondering if this one is either through the school or the school is partnering with an organization to offer it to their students.
It almost sounds it’s structured like some commercial loan…sometimes with those, you pay interest only…no principal. Folks use them sometimes to buy things like investment business real estate. Pay interest only and then pay off the principal when you sell.
Signing for four years could be like the master promissory loan that students sign for the federal student loans. After signing that first time, they only have to accept the next amount on the student portal. Of course, they do have to file the FAFSA every year and the school has to verify that they are in school that semester.
Anyway, parents need to be cautious when they agree to these loans.
One situation I read about finds a parent unable to continue making the interest-only payment for her current college junior (Child1). The family now has another child in college with a similar loan situation. The interest-only payment for Child1 has now risen to $500/month and the interest-only payment for Child2 is currently around $130. The combination is too much for the family…and will be around $800+ per month next year…again this is interest only!
These loans (and other cosigned offerings) can seem like the answer to one’s prayers when parents want to give their child the school the child of their dreams, but few seem to read the “fine print” or look at the projected payments once more loans are disbursed.
And it goes without saying that any time parents cosign loans or take out Parent Plus loans with the “promise” that the child will pay them back, please look at your child’s potential earnings upon graduation. There’s a thread in this forum about students (and likely their parents) who overestimated their future earnings.
These people clearly can’t afford the loans they are taking out. If these were PLUS loans and they had to reapply every year, it is likely they’d still qualify as debt ration is not a consideration.
If they had a PLUS loan, they could ask to defer the payments until after graduation and not even realize what the monthly payments (for the first child ) would be. If the first was still in school when the second states, they’d qualify for those loans too. As long as they aren’t in default, they can keep borrowing, keep deferring!
If this is a new ‘type’ of loan, it doesn’t sound that different than a Plus loan except they don’t have to requalify (which isn’t hard to do) every year, and they are required to pay the interest as it accrues rather than ask for a deferral.
From the info written, I’m able to estimate that they’re borrowing about $20k-30k per year. The interest rate wasn’t mentioned, hence the estimate.
@twoinanddone Agree. The loans aren’t affordable. It’s rather clear that the school was chosen simply because the child insisted on attending that school.